More Selling Could Be in the Works

Selling appeared to be picking up as we hit the Thanksgiving break. The selling has been supported by bearish market sentiment and breadth. Now, as we approach the final month of the year, it looks like, unless we see a strong rally similar to what we saw in 2006, stocks may end up with lower gains compared to 2006. The NASDAQ is up around six percent and is below its 9.52% return of 2006. The S&P 500 remains below 1,500 and is just below breakeven. The small-cap Russell 2000 is below 800 and down six percent. The DOW is up about only three percent and struggling to hold.

 The near-term technical picture does not look good and suggests more selling may be in the works, although stocks are technically oversold, so we could see some buying at the current levels. The problem is where the bottom is, as stocks could falter further.

 Take a look at the new-high/new-low ratio (NHNL) ratio, a measure of the number of stocks touching a new 52-week high versus the number of stocks that have declined to new 52-week lows. The theory is that, in a bullish market, investors quickly bid up stock and you see a rising NHNL ratio. When investors get nervous, less new highs are made and the NHNL ratio will tend to decline, thereby, giving you a warning. At the other end of the spectrum, bear markets have more new lows than new highs.

 There is a general guideline that we use to examine the NHNL ratio. When the ratio is above 70%, it is bullish; below 70%, it is a warning; and below 20%, it is bearish. Watch the sentiment to see how the market is feeling.

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 The NHNL on the NYSE has been extremely weak, with only three of the last 29 sessions above 70% and the last 10 straight sessions showing a bearish sub-20% reading. The near-term trend is down. The NHNL on the NASDAQ has also been weak, with the last 29 sessions below 70%, including eight of the last 11 sessions showing a bearish sub-20% reading. The near-term trend is down.